Of these customers, 56,000 were not even sent their policy summaries setting out the key points in the cover, such as its main features and benefits.

The FSA discovered that some of the firm's salesmen, the UK's biggest seller of mobile phones, did not have any administrative mechanism for sending out the policies.

"The Carphone Warehouse Ltd failed its telephone sales consumers by not giving them all the information necessary for them properly to understand the insurance product they had bought," said Sarah Wilson, director of retail firms at the FSA.

"Customers were therefore exposed to the risk of being left with an insurance policy which was unnecessary or provided incomplete cover leading to rejected claims.

"In either case they could suffer some degree of financial loss."

Carphone response

This was disputed by Carphone Warehouse which had volunteered to be regulated by the FSA in January 2005.

While admitting the technical accuracy of the regulator's complaint, it said: "We find the FSA fine surprising and disproportionate. We believe that customers have suffered no disbenefit."

The company pointed out that it had been selling insurance cover for mobile phones since 1993 and has a million insurance policies in force.

Charles Dunstone, the firm's founder and chief executive, said: "We take every aspect of service and administration very seriously. The FSA response does, however, feel a bit like a sledgehammer to crack a nut."

The regulator was particularly annoyed that the Carphone Warehouse had kept quiet about the failings of its sales force until last October even though it knew about them in March last year.